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Report on Review of the Cost of Various Methods of Payment

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Financial Management Policy Division
Deputy Comptroller General Branch
January 1998


Table of Contents

 

Executive Summary

Introduction

Summary of Costing Analyses

Conclusion

Annex 1 - List of Departments/Agencies Participating in the Review of the Cost of Various Methods of Payment

Annex 2 - Costing Approach and Methodology Adopted


Executive Summary

This report presents the costing analyses which compare the operating cost of processing payment transactions through the following payment methods in the federal government:

(a) Petty cash;
(b) Departmental bank accounts (DBA);
(c) Travellers cheques;
(d) Acquisition cards; and
(e) Central cheque issue by Public Works and Government Services Canada (PWGSC).

The cost analysis primarily focuses on the operating costs of processing the transactions through the various payment methods. The costs of procurement activities (i.e. purchases, contracting, etc.) are outside the scope of this review, and are therefore not included.

The cost studies originated in 1991 when BMCI Consulting Inc. (BMCI) was engaged to conduct a detailed analysis of various payment methods in the government and to determine the cost of each method. The report was submitted in March 1992. To update the costing, BMCI was commissioned in early 1997 to perform a preliminary study in four departments and to identify changes in the process flows of the payment methods. The project was then further taken up by the Treasury Board Secretariat, and the analyses have been extended to some more departments to validate the costing methodology and BMCI's initial findings.

The costing comparison, as detailed in paragraphs 2.1 to 2.6 of this report, is shown below:

Average cost per transaction for 1997

* Assuming requisition is received by PWGSC through "bulk input host-to-host". The total cost (PWGSC and departmental costs) for central cheque issue depends on the input method used. For FINCON input, the total cost is $6.84 per transaction while for manual or urgent cheque requisition, the cost is $8.70 and $9.86 respectively.

While the average cost worked out for each payment method can be affected by specific factors like the degree of centralization of purchasing/payment functions in departments, the complexity and volume of transactions as well as the efficiency of systems and procedures, it is considered that the relative cost comparison as generalized from the costing analyses would be useful for the evaluation of payment practices and strategy in departments.

The average costs for petty cash, DBAs and travellers cheques are on the high side which is mainly due to the necessary accounting and control procedures for operating these payment methods. Meanwhile, acquisition card has the lowest cost as only one payment requisition is raised instead of multiple cheques for individual transactions in the monthly bill. The cost for central cheque issue hinges on the way payment information is provided to PWGSC, and is relatively high for both manual and urgent cheque issue which require special handling.

The selection of an appropriate payment method depends on the nature, type and urgency of the payment, as well as the unique circumstances in departments like the systems and internal controls in use. It should however be pointed out that the cost of the payment method should also be taken into account, and the most cost-effective alternative should be used whenever possible. For instance, with the growing use of acquisition cards in recent years, consideration may be given to acquire some of the purchases through the use of acquisition cards in place of petty cash. This can bring about cost savings of around $4 per transaction.

In the evaluation of their payment strategy and practices, departments/agencies should endeavour to use the most appropriate and cost-effective methods for making payments, and to identify areas where improvement may be feasible.


Introduction

1.1 Background

During 1991, the Treasury Board Secretariat (TBS) engaged an external consultant, BMCI Consulting Inc. (BMCI), to conduct a detailed analysis of various methods of payment in the federal government and to determine the cost of each method. The report was completed and submitted in March 1992. In early 1997, it was decided to update the costing studies, using the methodology developed earlier. BMCI was commissioned at the outset to carry out a preliminary study in four departments, identify changes in the process flows of the selected payment methods and update the costing. The project was then further taken up by TBS, and the analyses have been extended to some more departments to validate the costing methodology and BMCI's initial findings. The list of departments/agencies participating in this project is given in Annex 1 of this report.

1.2 Project Scope and Objective

The review aims to analyze and compare the operating costs of processing payment transactions through the following payment methods in the federal government:

(a) Petty cash;
(b) Departmental bank accounts;
(c) Travellers cheques;
(d) Acquisition cards; and
(e) Central cheque issue by the Public Works and Government Services Canada.

Apart from other factors like the nature and urgency of the payment, the cost of the payment methods should also be duly considered in the choice among the available means and, whenever possible, the most cost-effective alternative should be used. The review thus provides departments/agencies with the costing analyses and comparison required in the evaluation process.

1.3 Costing Approach and Methodology

The costing is conducted using the process costing methodology. Basically, the process flow of each payment method is first analyzed into a series of activities. And the estimated processing cost per transaction is worked out on an average basis based on:

  • costs accumulated on individual activities within a defined time period
  • average time spent to process each transaction

The major cost elements comprise the following:

  • salary cost
  • employee benefits
  • accommodation cost
  • administration overhead

The detailed costing bases and underlying assumptions for this review are set out in Annex 2 of this report.

1.4 Scope of Costing

The cost analysis of each payment method includes the operating costs of processing the transactions through the various payment methods. The costs of procurement activities (i.e. purchases, contracting, etc.) are outside the scope of this review, and are therefore not included. In addition, it excludes the initial costs incurred to establish a payment method such as a petty cash or departmental bank account, as well as the costs incurred to maintain a method such as transferring a petty cash to a new custodian or the cancellation of an acquisition card.

The costs associated with data communication, data processing, printing of certain documents such as payment requisitions and cheque registers, and document archiving are not included in the costing since the impact on the estimated average cost per transaction is considered immaterial.


Summary of Costing Analyses

The costing analyses based on BMCI's report, supplemented by several other departments' input in recent months, are summarized in the ensuing paragraphs.

2.1 Petty Cash

A petty cash fund is used to facilitate and accelerate the processing of low value transactions. It is a cash advance issued to a custodian who is responsible for the security of the fund and the control of disbursements made from the fund.

The major activities undertaken by the petty cash custodian and others involved in the payment processing are:

  • handling of individual cash disbursements
  • verification of disbursement requests with supporting documents pursuant to section 34 of the Financial Administration Act (FAA)
  • recording individual transactions in the petty cash statement
  • payment requisitioning and authorization procedures under FAA section 33
  • replenishment of petty cash fund by cashing Receiver General cheques

The range of the estimated processing cost per transaction for this payment method is shown below:

  1991 1997
Method of Payment Cost Range Average Cost Range Average *
Petty cash $3.77 to $7.43 $5.60 $5.01 to $9.85 $7.59

* The average is based on the costing for four departments.

As compared with the other payment methods under review, the unit cost for petty cash is the highest, which is mainly associated with the procedures for handling individual disbursement requests, and the reporting, accounting and controlling of the petty cash funds. Periodic replenishment of the petty cash fund is also required.

The increase in the average cost per transaction from $5.60 in 1991 to $7.59 in 1997 is mainly due to the fact that for the 1991 costing, the cost of salary was computed at the average salary within the employees' classification level whereas for 1997, it was assumed that all personnel had reached the maximum salary within the classification level. The costing bases and underlying assumptions in respect of the major cost elements are detailed in Annex 2 of this report.

2.2 Departmental Bank Accounts

Departmental bank accounts (DBA) enable departments to make payments when the normal facilities for the issue of Receiver General cheques are not immediately available. DBAs are normally used for the standard classes of payments stipulated in the Cheque Issue Regulations, such as emergency salary advances, reimbursement of travel and removal expenses, reimbursement of expenditures made from petty cash advances and payment for local supplies and services of an urgent nature.

The major activities involved under this payment method are:

  • DBA payment – FAA section 34 account verification and signing of DBA cheques by the joint signatories
  • cheque issue reporting – preparation of DBA vouchers and verification with supporting documents
  • payment requisitioning and authorization procedures under FAA section 33

The range of the estimated processing cost per transaction for this payment method is shown below:

  1991 # 1997
Method of Payment Cost Range Average Cost Range Average *
Departmental bank account $6.61 $6.61 $6.23 to 6.83 $6.53

# Only one department was covered under this payment method in the 1991 studies.
* The average is based on the costing for two departments.

As compared with the other payment methods, the unit cost for DBA is also on the high side. This is mainly due to the accounting and control procedures, which are usually manual, required to be in place in departments for processing DBA transactions and for procuring, safekeeping, controlling and handling of cheques.

2.3 Travellers Cheques

Upon presentation of an approved Travel Authority and Advance form, the custodian will issue travellers cheques to the employee. The travellers cheque supplier is paid by the department on the payment requisition dates scheduled twice a week, usually through a Receiver General cheque.

The major activities involved under this payment method are:

  • acquisition of the travellers cheques from the supplier companies
  • "sale" of travellers cheques – verification of approval of travel authority, preparation of Purchase Application Form and recording of sales
  • payment of travellers cheques – preparation of Daily Settlement Form and reconciliation of inventory of travellers cheques held
  • certification and authorization pursuant to sections 33 and 34 of FAA

The range of the estimated processing cost per transaction for this payment method is shown below:

  1991 1997
Method of Payment Cost Range Average Cost Range Average *
Travellers cheques $6.87 to $7.96 $7.42 $4.78 to $7.89 $6.47

* The average is based on the costing for three departments.

The average unit cost for travellers cheques for 1997, being only marginally below that for DBA, is also on the high side. This is mainly related to the accounting and control procedures required to be in place in departments for procuring, protecting, controlling and handling travellers cheques.

Nevertheless, it is noted that the unit cost for travellers cheques has dropped since 1991. This can be explained by the introduction of the automated express cheque points of sale in some departments and the electronic interfaces with the suppliers.

2.4 Acquisition Cards

The acquisition card is an alternative payment method for processing purchases involving large volumes of small dollar value transactions. The use of acquisition cards is subject to some restrictions, one of which is that the card must be used only to make authorized official government purchases within the limitations established for it. The requisition for payment to the card company is raised by departments to the Public Works and Government Services Canada (PWGSC) for cheque issue.

The major activities involved under this payment method are:

  • FAA section 34 – verification of supporting documents to the monthly credit card statement, preparation of disbursement summary and cheque requisition
  • FAA section 33 – certification and authorization of accounting documents

The range of the estimated processing cost per transaction for this payment method is shown below:

  1991 1997
Method of Payment Cost Range Average Cost Range Average *
Acquisition cards $1.26 to $2.22 $1.74 $2.52 to $4.75 $3.58

* The average is based on the costing for four departments.

The rise in the average cost from $1.74 per transaction in 1991 to $3.58 in 1997 can be explained by the following:

  • the average cost for 1991 is based on the costing for only two departments, and one of which handled an enormous number of transactions, thereby resulting in very low unit cost
  • among the four departments covered under this method in the 1997 study, one department has a centralized purchasing/payment function (with close monitoring by staff at senior level), thereby resulting in higher unit cost

Notwithstanding the rise as explained above, the average unit cost for acquisition card is still the lowest among the payment methods. The factors attributable to this include:

  • the department issues only one payment requisition to the Receiver General for payment instead of multiple cheques for individual transactions in the monthly credit card statement
  • electronic interfaces can be established with the card companies for capturing the transaction details

2.5 Central Cheque Issue

Central cheque issue is the prevalent payment method used within the government and comprises two categories (a) standard cheque issue, and (b) urgent cheque issue. Central cheque issue includes all Receiver General cheques issued by PWGSC on behalf of government departments.

Departments are responsible for account verification, payment requisitioning and ensuring that the cheque register details provided by PWGSC upon issuing cheques are reconciled with the source documents.

PWGSC responsibilities for central cheque issue include:

  • operation, control and reconciliation of Receiver General bank accounts
  • redemption and reconciliation of 'paid instruments'
  • verification of payment requisitions
  • data capture for hard copy requisitioning
  • payment preparation and distribution
  • management and operation of the Payment on Due Date (PODD) system
  • accounting and reporting

2.5.1 Payment Processing by Departments

The payment process starts at the point of receipt of goods or services in the case of accounts payable. The major activities involved under this payment method are:

  • FAA section 34 – verification of supporting documents and preparation of a payment requisition
  • FAA section 33 – certification and authorization of accounting documents

The range of the estimated processing cost per transaction at the departmental level (that is, before including the costs incurred by PWGSC) for this payment method is:

  1991 1997
Method of Payment Cost Range Average Cost Range Average *
Central cheque issue $4.78 to $6.43 $5.61 $3.92 to $6.38 $5.20

* The average is based on the costing for four departments.

The average unit cost for this payment method at departmental level is in between that for acquisition cards and DBA.

2.5.2 Central Cheque Issue and Related Services by PWGSC

Payment requisitions can be electronically fed to PWGSC's payment system through the following means:

  • Bulk input host-to-host
  • Bulk input magnetic tape
  • Magnetic tape input
  • FINCON input

Alternatively payment requisitions can also be made by hard copy or manual input. In case of urgent cheque issue, special handling (e.g. cheque delivery) is required and the unit cost is correspondingly higher.

The estimated cost per transaction incurred by PWGSC for this payment method is shown below:

  1991 1997
Method Central
cheque issue

($)
Bank
reconciliation

($)

Total

($)
Central
cheque issue
($)
Bank
reconciliation
($)

Total
($)
A 0.76 0.10 0.86 0.94 0.10 1.04
B 0.77 0.10 0.87 0.94 0.10 1.04
C 0.85 0.10 0.95 1.06 0.10 1.16
D 1.23 0.10 1.33 1.54 0.10 1.64
E 2.96 0.10 3.06 3.40 0.10 3.50
F 3.92 0.10 4.02 4.56 0.10 4.66

A: Bulk input host-to-host
B: Bulk input magnetic tape
C: Magnetic tape input
D: FINCON input
E: Manual cheque issue
F: Urgent cheque issue

The primary cost items for the above include:

  • staff effort spent on logging and monitoring of transmission of payment data
  • verification of FAA section 33 approval and limit of authority
  • generation of summary and detailed transaction reports
  • postage, cheques and envelopes
  • compensation to financial institutions for cashing cheques

The marginal increase in the average unit cost since 1991 is mainly due to the rise in postage cost for delivering cheques to the payees.

2.5.3 Direct Deposit

Direct deposits are used primarily for pay and superannuation payments. This payment method allows the beneficiary to have payments deposited directly into a designated bank account. Upon receipt of a payment requisition (based on receipt of an enrolment form by the department), the PWGSC payment system generates payment instructions to credit the amount payable to the recipients' accounts. The costs incurred by departments are negligible since they are incurred only at the implementation stage or when there is a change.

The estimated cost per transaction incurred by PWGSC for this payment method is:

  Estimated average cost per transaction
Method of Payment 1991 1997
Direct deposit $0.28 $0.29

2.5.4 Total Cost for Central Cheque Issue

The combined total average costs (i.e. PWGSC and departmental costs) per transaction under the different payment requisition methods are illustrated below:

Central Cheque Issue - average cost per transaction for 1997

The cost for central cheque issue hinges on the way payment information is provided to PWGSC, and is relatively high for both manual and urgent cheque issue which require special handling effort.

2.6 Comparison of the Cost of Various Methods of Payment

While the average processing cost per transaction worked out for each of the payment methods in individual departments can be affected by factors like the degree of centralization of purchasing/payment functions, nature, complexity and volume of transactions, and the efficiency of systems, procedures and personnel, it is considered that the relative cost comparison as generalized from the costing analyses would be useful for the evaluation of payment practices and strategy in departments.

The cost comparison among the payment methods is shown in the following two graphs (one showing the average cost per transaction in dollar value and the other showing a relative comparison using the acquisition card as the base=100).

Costing Analysis

* Assuming payment requisition is received by PWGSC through "bulk input host-to-host".

Relative Cost Comparison Using Acquisition Cards as Base=100

* Assuming payment requisition is received by PWGSC through "bulk input host-to-host".

The average costs for petty cash, DBAs and travellers cheques are on the high side which is mainly due to the necessary accounting and control procedures for operating these payment methods. Meanwhile, acquisition card has the lowest cost as only one payment requisition is raised instead of multiple cheques for individual transactions in the monthly bill. The cost for central cheque issue depends on the way payment information is provided to PWGSC. The manual and urgent cheque issue, which require special handling effort, are the more expensive options.


Conclusion

The selection of an appropriate payment method for a particular payment depends on the nature, type and urgency of the payment, the vendors as well as the unique circumstances in departments like the systems and internal controls in use. It should however be pointed out that the cost of the payment method should also be taken into account, and the most cost-effective alternative should be used whenever possible. The costing analyses presented in this report serve to give a relative cost comparison among the various payment methods, which should be useful in the evaluation process. Moreover, departments/agencies should also have consideration to the following in the selection of the appropriate payment method:

  • The use of acquisition cards speeds up the purchasing process. With appropriate controls, this purchase method provides a convenient and less burdensome way of procuring and paying for goods and services. In addition, departments can achieve further cost savings through the establishment of electronic interfaces with card companies to capture the transaction details. Finally, the cost to departments of making acquisition card payments is the lowest among the payment methods reviewed.
  • Individual travel card use is the preferred alternative to travellers cheques for authorized travel purposes in view of the cost and control considerations. Travellers cheques therefore are to be used only where it is not feasible or economical to use the individual travel card. This is in accordance with the Treasury Board Manual, Comptrollership Volume Chapter 2-7 "Policy on Using Travellers Cheques, Travel Cards and Travel Accounts". (Please also see the footnote below.)
  • The travellers cheque supplier has the capability to electronically link their invoices to departmental accounting system. This method of transfer of data permits departments to electronically reconcile the supplier's invoice and to download transaction details. Departments can achieve cost savings by implementing such electronic interfaces. (Please also see the footnote below.(1))
  • Departmental bank accounts enable departments to make payments when the normal facilities for the issue of Receiver General cheques are not immediately available for several classes of payment. With the disadvantage of having a high unit cost, the usage of DBAs should be subject to periodic review to see whether the DBA payments can be replaced by central cheque issue by PWGSC or by use of acquisition cards.
  • Petty cash provides administrative convenience and minimizes the effort for processing large number of payment requisitions for small dollar amounts. However, disadvantages include the higher unit cost at the departmental level. With the growing use of acquisition cards in recent years, consideration may be given to acquire some of the purchases through the use of acquisition card.
  • The cost for central cheque issue depends on the way the payment is requisitioned, and is relatively high for both manual and urgent cheque issue which require special handling effort. These two more expensive options therefore should only be used when the standard cheque issue is not feasible.

In the evaluation of their payment strategy and practices, departments/agencies should endeavour to use the most appropriate and cost-effective methods for making payments, and to identify areas where improvement may be feasible.


Annex 1 – List of Departments/Agencies Participating in the Review of the Cost of Various Methods of Payment

  1. Environment Canada
  2. National Research Council
  3. Agriculture Canada
  4. Public Works and Government Services Canada
  5. Transport Canada
  6. Department of Foreign Affairs and International Trade

Annex 2 – Costing Approach and Methodology Adopted

The costing studies are carried out using the process costing methodology. The costing bases and assumptions for the respective cost elements are set out below:

Cost of Salary

This refers to the annual salary payable to the employee concerned. In the initial review undertaken by BMCI in 1997, it was assumed that all personnel had reached the maximum salary within the employee's classification level in view of the ongoing hiring freeze and the yearly salary increments in recent years. The maximum salary provides a consistent basis for comparing the estimated average cost per transaction between methods of payment. On the other hand, in the 1991 costing studies, the average salary within the employees' classification level was used in the computation.

Employee Benefits

The average rate for employee benefits for 1997 is 21.58% (1991: 19.11%) on salary as laid down in the TBS Publications for the Management of the Federal Government on Costing Methodology – Employment and Contracting. The rate includes the following:

  • Government's matching contribution to the Supplementary Retirement Benefit Account;
  • Government's matching contribution to the Public Service Superannuation Account;
  • Statutory payments under the Supplementary Retirement Benefits Act;
  • Matching contributions to the Canada Pension Plan/ Quebec Pension Plan;
  • Matching contributions to the Death Benefit Account;
  • GSMIP/PSMIP;
  • Dental Plan;
  • Disability Insurance;
  • Provincial Health;
  • Workers Compensation; and
  • Severance Pay.

Administrative Overhead

The purpose for calculating an overhead rate is to capture the overhead costs associated with processing payments. The administration costs include common services such as:

  • personnel services;
  • materiel management services;
  • property management services; and
  • financial services.

In the initial review undertaken by BMCI in 1997, an average administration rate of 16% (1991: 12.7%) on salary was calculated and applied in the costing which served to capture a minimum administration cost associated with the human resources involved in processing payments.

Accommodation Cost

In the initial review undertaken by BMCI in 1997, an average accommodation cost of $4,095 per full time employee (FTE) was calculated and applied in the costing. On the other hand, in the 1991 costing studies, the cost of accommodation calculated for an employee consisted of the average annual cost for usable space corresponding to the employee's average salary.

Total Overhead Cost

This represents the summation of the employee benefits, administrative overhead and accommodation cost.

Hourly Rate

The calculated total cost (i.e. cost of salary, employee benefits, administrative overhead and accommodation cost) is divided by 1,558 productive hours per year to arrive at the hourly rate. These productive hours, as provided by the Human Resources Branch of the TBS, account for 392 hours of time not worked which include statutory holidays, vacation leave, sick leave, and other leave and rest periods.

Time Element – Estimated Minutes

The time element represents the average time the employee is involved in processing a transaction like a requisition for stocked items, or one transaction in a group of transactions such as a petty cash replenishment.

For this study, a transaction is defined as one invoice such as a requisition for stocked items, or the process of reimbursing an employee from petty cash for expenses like parking and processing a film. For acquisition cards, it refers to individual purchases.

The employees, responsible for performing the documented duties, are required to estimate the actual time taken to process transactions. The time estimates may be given in various time measurement such as daily, weekly, monthly or annually. These time estimates are then allocated to individual transactions by dividing the total estimated time by the total transactions or workload processed by the employee during the time measurement.

Average Processing Cost per Transaction

The average cost is determined by dividing the hourly rate by 60 minutes and then multiplying the result by the estimated minutes. For each activity, the cost elements comprising the cost of salary, employee benefits, administrative overhead and accommodation cost are identified, summed up and then divided by the time spent to work out the average cost per transaction. Finally, the computed average cost per transaction of individual activities are aggregated, together with other incidental costs (e.g. cost of pre-printed forms), to arrive at the total estimated average processing cost per transaction of the payment method.


(1) Note: The average cost per transaction for travellers cheque is worked out based on the 1997 arrangements between departments, Receiver General and the travellers cheque supplier. In this connection, please note that travellers cheques are part of the new contract for the Federal Government Travel Card Program which commenced in January 1998. Under the travellers cheque issue arrangements envisaged for the new contract, the average cost per transaction will be different.

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